The Hindu Business Line : Decolight Ceramics: Avoid

Given the huge capacity additions, the company faces the risk of competition from unorganised players and a glut in the event of a real-estate slowdown.

Investors can avoid the initial public offer of Decolight Ceramics for now. This vitrified ceramic company, whose revenues started flowing in only in 2005, may have to garner higher market share in the organised segment to sustain in the tile market. It could otherwise face stiff competition from unorganised players and Chinese products.

At the offer price band of Rs 45-54, the share is being offered at 8-10 times its FY-07 earnings. Post-equity expansion, the price earnings multiple (at the offer price band) is likely to be 10-11 times the expected earnings for FY08. This valuation is at a premium to bigger players in the industry. While Euro Ceramics recently made an IPO with similar valuation, the premium appeared justified considering that it was moving to a slightly higher-end segment of sanitary ware. .

offer details

Decolight Ceramics is a vitrified ceramic tiles maker and a trader in other ceramic tiles. It has ramped up its vitrified tile capacity for to 12,000 sq m recently. Majority of the funds from the offer is to be used for setting up three wind turbine generators (WTGs) for captive consumption and for purchasing machinery for the recently expanded capacity, which has already commenced operation. Further, the company plans to set up facilities for manufacturing aluminium composite panels used in commercial buildings.

The impact of the company's doubling of capacity is likely to start showing up in its topline from FY-08. However, the near doubling of equity is likely to slow per share earnings growth, as a chunk of the proceeds is to be deployed in WTG. Given that the there has been some delay in setting up the first WTG itself, we have not factored in savings on account of wind power or revenue from ACP (expected to commence production in October) for FY-08.

Cost advantages

Decolight derives some advantages through its geographical location. One, it is near the city of Morbi in Gujarat, which has comfortable supply of clay. Further, its gasifier system can be fed comfortably with coal, thanks to the Gujarat port. Decolight's operating profit margin has grown from 19 per cent to 22 per cent over FY2005-07. While this is on a par with the industry average , the company could have improved margins to compete with some of the bigger players. The company's dependence on Ukraine clay, which is 40 per cent of the total raw material consumed, and which requires to be stored in large quantities (due to erratic supply) may be a drag on margins.

That we view this IPO with caution primarily stems from the fact that the company is going for huge capacity additions at one go.

While there is no denying that the tile market is riding the realty boom, the unorganised space in this sector, which is a bigger market, would be equally interested in cashing in on this growth. That there is stiff pricing war in this industry from the local unorganised segment and from Chinese players is well-known.

Given these issues, any slowdown in real-estate or excess supply of tiles may lead to huge over-capacities or poor pricing to remain in this business.

Further, although Decolight's products are sold under its own brand name, the company has so far not had its own retail outlets.

Unless the company is able to market its brand well and retain corporates and top builders as its client, it may face tough times on the back of its relatively short track record.

The offer is open from May 24-27. IDBI Capital is the book running lead manager.

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